Without global insurer American International Group's Financial Products outfit, located in London, the financial calamity would've been less severe. AIG FP, as it was known, sold oodles of a product called a credit default swap, essentially an insurance policy on bundles of subprime mortgages. (The way it worked, if the homeowners stopped making payments on their mortgages and money ceased to flow into those mortgage pools, the owner of that unregulated insurance policy got a big payout for a pretty small initial investment.) Problem is, AIG FP, led by a guy named Joseph Cassano, sold way too many credit default swaps. Way, way too many of them. And when the housing bubble burst, AIG was forced to post cash or securities for all those people to whom AIG had sold these swaps. The rest you know: the firm crumbled, was deemed "too-big-to-fail" and got more than $140 billion in bailout cash, and so on.
Now comes this news: Despite leading an office that nearly imploded the global markets, Cassano, who author Michael Lewis dubbed "The Man Who Crashed the World," will face no charges for his role in the crisis. The Department of Justice had been investigating Cassano, the New York Timesreports, to see "whether Mr. Cassano misled investors when he stated in December 2007 that the company’s obligations on the mortgage securities it backed were unlikely to produce losses." Apparently he didn't. Which means he was arguably the most oblivious executive to ever run such a complex, powerful financial operation.
Cassano's dropped case is indicative of a broader failure by regulators and prosecutors to nail down any high-level culprits from the financial crisis. In a recent investigation, the Huffington Post Investigative Fund detailed how, despite banks' reports of massive levels of fraud, banks regulators hadn't made one criminal referral stemming from the financial crisis. Why not? A culture of self-policing, the I Fund's David Heath writes:
While data on criminal referrals during the S&L crisis is spotty, the Government Accountability Office reported that in the first ten months of 1992 alone – a random snapshot – financial regulators sent the Justice Department more than 1,000 cases for criminal prosecution...
This time, prosecutors are relying more heavily on banks to report suspicious activity to the Treasury Department. Banks are required to report known or suspected criminal violations, including fraud, on Suspicious Activity Reports designed for the purpose. In effect, the reports, which can be many pages in length, provide substantive leads for criminal investigations.
Moreover, Heath adds, there are fewer cops on the beat when it comes to white-collar financial crime: "Deputy Director John Pistole testified before Congress last year that the bureau had 1,000 people working on the S&L crisis at its height. That compares to about 240 agents working on mortgage fraud cases last year."
Whether the lack of resources and hands-off mentality influenced Cassano's case is unclear. But it's telling that the leader of arguably the most infamous operation throughout the entire crisis will walk away from the entire mess with only a bruised ego and a tarnished name.
Last week's passage in the Senate of a historic and comprehensive financial reform bill clinched a personal victory for Senate majority leader Harry Reid (D-Nev.). And Reid is a man in need of big wins. He's facing double-digit deficits in midterm election polling and an anti-incumbent mood sweeping the country. Will financial reform give Reid the boost he needs to defeat his Republican opponent?
The Nevada senator's poll numbers in his 2010 reelection bid have been sagging for months. After expending massive amounts of political capital on a health care bill that's deeply unpopular in his home state, Reid is trailing all of his Republican challengers. An April 27 Rasmussen poll put his leading opponent, former Nevada GOP chairwoman Sue Lowden, ahead by 13 percentage points, an advantage Lowden has more or less maintained since the beginning of the year. Reid trails two other Republicans, Danny Tarkanian and Sharron Angle, by between eight to 10 points in the polls as well. So bad was his standing in Nevada earlier this year that he had to reassure voters he was still running for reelection.
The Senate's financial reform battle gave Reid an ideal opportunity to fight back from the brink. His top Democratic counterpart, Sen. Chris Dodd (D-Conn.), who's retiring this year, did much of the party's back-room dealing and absorbed most of the Democratic-directed criticism. That left Reid, a former amateur boxer, to bash his two favorite punching bags—Republicans and big banks.
With last night's passage of the Senate's financial reform bill, next up is what's called "conference," where the House and Senate must resolve any differences and merge their two bills. In size and scope, the two bills are pretty much the same. But as always, the devil is in the details.
Here's a breakdown of the differences between the House bill, shepherded through that chamber by Rep. Barney Frank (D-Mass.), the House financial services committee chairman, and the Senate's, which relied on the negotiating acumen of Sen. Chris Dodd (D-Conn.), the banking committee chair, and Majority Leader Harry Reid's (D-Nev.) hard-charging leadership. I'll be updating this post as I dig through the two bills for more notable discrepancies.
All this week, despite Republican threats to prolong or outright block the process, Senate Majority Leader Harry Reid (D-Nev.) said he wanted a swift finish to the Senate's debate on financial reform. Right on schedule, Reid got what he wanted. This evening, the Senate passed its massive, far-reaching, historic overhaul of how Wall Street does business and how our financial markets function. The vote was 59-39.
Unlike the hyperpartisan nature of health care reform's passage, the Senate's victory tonight featured a modicum of Republican support. Sens. Scott Brown (R-Mass.), Olympia Snowe (R-Me.), and Susan Collins (R-Me.), all of whom voted for the cloture motion to essentially end the debate on financial reform earlier this afternoon, as well as Sen. Charles Grassley (R-Ia.) voted in favor. There were two Democratic defectors: Sens. Maria Cantwell (D-Wash.) and Russ Feingold (D-Wisc.), both of whom voted against the bill because they thought it wasn't strong enough. Cantwell said changes were needed to the bill's derivatives reform language, which right now doesn't punish those who disobey the bill's proposed rules. The Senate's derivatives reform, in her view, is toothless. Meanwhile, Feingold said he believed the bill simply doesn't do enough to prevent banks and non-bank financial companies from becoming too-big- and too-interconnected-to-fail.
Financial reform advocates and the Obama administration generally hailed the bill's passage this evening. "Today we stand closer than ever to enacting meaningful financial reform that will benefit every American family and business, help improve the competitiveness of our financial markets, and strengthen the safety and soundness of our financial system," said Treasury Secretary Tim Geithner. "This bill, while not perfect, takes significant steps to close those regulatory gaps and make our financial system both safer and more stable," added Barbara Roper, director of investor protection at the Consumer Federation of America. Michael Calhoun, president of the Center for Responsible Lending, congratulated lawmakers but warned, "[C]oncerns remain. In this final stretch we hope lawmakers will resist Wall Street’s efforts to water down the bills’ strong provisions."
On his second try, Senate Majority Leader Harry Reid (D-Nev.) corralled together enough votes to all but end the debate on financial reform and set up a final vote tomorrow evening. Joining 57 Democrats to vote "Yes" on today's cloture motion, the second in two days, were Maine Republicans Olympia Snowe and Susan Collins and Massachusetts Senator Scott Brown. The cloture motion passed 60-40.
The real story of today's vote, though, involves the two Democratic "No" votes, Senators Maria Cantwell (D-Wash.) and Russ Feingold (D-Wisc.). Unlike their fellow "No" votes, Cantwell and Feingold opposed cloture today, as they did yesterday, because they want the bill to be tougher. Both senators say the bill doesn't go far enough on two hot-button subjects—preventing financial institutions from becoming too-big-to-fail and overhauling the derivatives markets.
In Feingold's case, he essentially wants to see some form of the Glass-Steagall Act—which erected a firewall between staid commercial banks and more risky investment banks—reinstated via the Senate's reform bill. Yesterday, after voting "No" the first time, Feingold said:
We need to eliminate the risk posed to our economy by ‘too big to fail’ financial firms and to reinstate the protective firewalls between Main Street banks and Wall Street firms. Unfortunately, these key reforms are not included in the bill. The test for this legislation is a simple one—whether it will prevent another financial crisis. As the bill stands, it fails that test. Ending debate on the bill is finishing before the job is done.
Maria Cantwell said yesterday after her first "No" vote that her main concern about the bill was that it contained no punishment for those who violated the new restrictions on derivatives. Cantwell explained that she wanted tougher language in the bill to crack down on derivatives users that don't comply with the bill—but that language has not yet been included, which likely explains her vote.
Cantwell and Feingold's defections are a major headache for Reid. It'll be a lot easier for Senate Minority Leader Mitch McConnell (R-Ky.) to reel back in one, two, or three of the GOPers who voted for cloture today, switching them from presumed "Yes"s to "No"s on the final vote. What's far harder is convincing Cantwell or Feingold that they should vote for the bill even though they see major, fundamental problems with how its currently written. With Feingold, he's essentially saying the biggest aspect of the bill—ending too-big-to-fail—won't fix anything and needs to be changed. There is, however, no way that'll be fixed in the next day—after all, it took months of backroom battling to get to where we are today.
Reid's got his work cut out for him winning over Cantwell and Feingold by tomorrow evening.